Despite disappointing corporate earnings, CEO pay is on the rise.
That’s according to a recent study by Executive data firm Equilar, which found that in 2015 median executive compensation rose by 3% even though the S&P 500 fell by 0.7%. One reason for this divergence may be companies using other measures besides GAAP earnings to determine CEO performance. On Friday, the Wall Street Journa l cited data from research firm Audit Analytics showing that companies are increasingly citing pro-forma results in proxy statements, which companies issue to investors when soliciting shareholder votes on issues including executive compensation.
Researchers found that “the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year,” according to the report. “Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.”
There are legitimate reasons why companies might do this, as GAAP accounting doesn’t always capture an executive’s true performance. Removing one-time restructuring charges, for instance, so that a smart management move doesn’t cause a CEO’s compensation to fall precipitously, may be a smart move. But the system can be manipulated if pro forma earnings are reported to exclude items that really do reflect poor performance by a CEO.